Supreme Court decision on Chevron doctrine will affect tax pros

The Supreme Court’s upcoming decision regarding the 40-year-old Chevron doctrine in two cases involving a National Marine Fisheries Service regulation could have wide-ranging implications for the IRS and tax professionals.

Experts who listened to oral arguments before the Court in January agree the justices are likely to undo the Chevron doctrine — the only question is to what degree, they say. The Court is expected to issue a decision before the end of its current term.

“In either case, either nullifying or walking back Chevron, a large amount of uncertainty will be injected into the work of tax professionals,” said Andrew Leahey, a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel University’s Kline School of Law. “They’ll find themselves using weasel words with clients much more often — this is ‘probably’ how this works, we ‘think’ this regulation will likely stand.”

Background

The Chevron doctrine arose from the Court’s 1984 decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). That decision requires courts to give deference to a reasonable interpretation of an ambiguous statute by a government agency.

But it was not until 2011, in Mayo Foundation for Medical Education and Research, 562 U.S. 44 (2011), that the justices resolved a split in the lower courts and held that Chevron deference applied to interpretive tax regulations issued under Sec. 7805(a), which gives a general grant of authority to Treasury to “prescribe all needful rules and regulations for enforcement” of the Code. Before that decision, courts had generally given a lower level of deference to Treasury’s interpretive regulations.

In January, the Court heard two cases — Loper Bright Enterprises, Inc. v. Raimondo, No. 22-451 (U.S. 1/17/24) (oral argument), and Relentless, Inc. v. Department of Commerce, No. 22-1219 (U.S. 1/17/24) (oral argument) — involving a National Marine Fisheries Service regulation that requires the herring industry to pay for observers on fishing boats. Both the D.C. Circuit and the First Circuit, respectively, applying the Chevron doctrine, upheld the rule.

Comments during oral arguments, such as those from Justice Neil Gorsuch, who said he was concerned about the effect of Chevron on the “little guy” who lacks power, led Leahey to say that the Court is likely to walk back the Chevron doctrine.

Mitchell Gans, a tax law professor at Hofstra University, suggested that prior writings by Gorsuch and Justice Clarence Thomas reflect their disapproval of Chevron — Thomas in Baldwin, 140 S. Ct. 690 (2020) (Thomas, J., dissenting from denial of cert.), and Gorsuch in Buffington v. McDonough, 143 S. Ct. 14 (2022) (Gorsuch, J., dissenting from denial of cert.).

Effect on tax regulations

Leahey, who believes that Chevron should stand, and Gans, who thinks, at a minimum, it should be modified, somewhat agree on the effect that any change would have on tax practitioners. Gans anticipates that a weaker version of deference will remain intact.

“The argument that [a] regulation is invalid … would be stronger than it would have been under Chevron,” Gans said. “I don’t know how many preparers are really going to be making that assessment. It seems to me more likely that it would be in the hands of those who do the litigation or who provide advice about the possible outcome of potential litigation.”

Since 2011, when the Court agreed that Chevron deference applied to interpretive Treasury regulations, the IRS appears to have responded to the incentive to use the Administrative Procedure Act’s (APA’s) notice-and-comment rulemaking process to make its interpretive regulations eligible for Chevron deference, one study cited by the Congressional Research Service said. The IRS also changed its Internal Revenue Manual to eliminate the statement that most regulations are interpretive and not subject to procedural requirements under the APA.

“These findings suggest that Treasury devoted more resources to promulgating regulations once tax regulations were held to be eligible for Chevron deference,” a report from the Congressional Research Service said. “Treasury may believe its use of notice-and-comment rulemaking procedures increases its chances of receiving judicial deference and prevailing in challenges to its regulations.”

Without Chevron, would Congress take responsibility for writing tax laws with specificity about how the laws are administered? It’s an interesting question, Gans said.

“I think that’s going to be an issue,” he said. “I don’t know if they’ll address it, or whether it will have to be addressed as a follow-up. If they say Chevron is gone, they’re still going to have to deal with this question of what about if Congress grants specific authority, and I don’t think they’re going to say Congress can’t do that.”

In the short term, a nullification of Chevron would mean that “much of the day-to-day regulatory framework for tax will be put on hold and litigated,” Leahey said. “In the longer term, Congress will need to be incredibly specific in the statutes it passes. This will be difficult in the current political environment, as getting anything done in Congress is a chore.”

If the Court modifies the Chevron doctrine, the justices have several options, Leahey said in an email response, “ranging from the very narrow (‘in this particular case, statutory silence was not an ambiguity subject to Chevron deference’) to the middle-of-the-road approach (‘silence is not an ambiguity’) all the way to a full-throated overturning of Chevron (‘deference to administrative agencies is never required’).”

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.